MNI: PBOC Restricts Banks Overnight Lending to NBFIs - Traders

     BEIJING (MNI) - The People's Bank of China has made it more difficult for

non-bank financial institutions (NBFIs) to borrow overnight money, as it has

ordered some banks to stop lending in order to force NBFIs to deleverage,

China-based traders have told MNI.

     Since Friday, there has been speculation, unconfirmed by official sources,

that the PBOC asked certain banks to stop lending overnight money to NBFIs,

although longer-term funding remains available. 

     On Monday, it appears more banks were ordered to stop lending overnight

money to NBFIs, a move confirmed by several traders. How long the measure will

remain in place is still uncertain, as the PBOC has not published any official

announcement.

     The PBOC's move is aimed at forcing NBFIs to deleverage by increasing

difficulties and costs for NBFIs to get funding to leverage up. According to one

trader, the overnight borrowing rate spread between banks and NBFIs was as high

as 100 basis points on Monday.

     The move is in line with the PBOC's Q3 Monetary Policies Report, which

stated "roll over overnight funding" to meet liquidity needs and overleveraging

is "inadvisable."

     The move did not spook the market, as current liquidity conditions remain

relatively abundant, due to the effects of the targeted required reserve ratio

cut, Contingent Reserve Allowances (CRA) and fiscal spending. The CFETS-ICAP

interbank liquidity index stood at 39 as of Tuesday's close, slightly lower than

Monday's closing level of 41, suggesting the liquidity condition remains good.

     Down the line, bond markets will likely be impacted if the measure

continues, as the deleveraging process by NBFIs will see an increase in selling

pressure.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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